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Investment Insights

January 2017

Finding Income in a Low-Rate World

“Even in a very low interest rate environment, we are able to find companies that can offer significant dividend yields and have some potential for capital appreciation.”

— Joyce Gordon

Joyce E. Gordon Portfolio Manager Los Angeles office 36 years of experience (as of 12/31/16)

Historically low interest rates have put a damper on income for many investors. CDs, Treasury notes and other guaranteed investments, while once a source of modest income, have lagged over the years. For example, the typical five-year CD interest rate is 0.82%, and the five-year daily treasury yield curve rate is 1.83%.* That means many investors have had to adjust their expectations or look to other, more risky, investments to help them pursue income.

*Weekly CD rates analysis as of November 30, 2016, Bankrate.com. Five-year daily treasury yield curve as of November 30, 2016, U.S. Department of the Treasury.

Rates Aren’t What They Used to Be

2000

2008

2017

5.43%
U.S. Federal Funds Rate

4.11%
U.S. Federal Funds Rate

0.66%
U.S. Federal Funds Rate


Source: Federal Reserve. Rates as of first business day of each year.

Rates Could Stay Lower for Longer In the past, extended periods of low rates have been common

Sources: Federal Reserve, Robert Shiller, Thomson Reuters Datastream. Data for 1876–1961 represents average monthly U.S. long-term government bond yields compiled by Robert Shiller. Data for 1962–2015 represents 10–year Treasury yields, as of December 31 each year within the period. Data for 2016 is as of September 30.

Municipal bonds
These bonds are issued by local and state governments to raise money for building schools, highways and other public projects.

Income & risk considerations:
Municipal bonds tend to be lower risk with less potential for income. Tax advantages can make them attractive to investors though, particularly those investors in higher tax brackets.

Investment-grade bonds
These bonds are issued by governments, agencies and companies to help them finance their operations.

Income & risk considerations:
Investment-grade bonds typically involve low-to-medium risk. Offerings are diverse, with issues that include U.S. Treasuries, mortgage-backed securities, inflation-protected bonds and a wide variety of corporate bonds.

High-yield bonds
Also known as “junk bonds,” these are typically issued by companies that may not have a proven history or are facing financial difficulty.

Income & risk considerations:
Riskier than other bonds, these investments have the potential for higher yields. Volatility of high-yield bond funds can approach that of stocks, however.

Dividend-paying stocks
Dividends are a way for companies to share earnings with their investors. They’re typically issued by mature companies with steady earnings.

Income & risk considerations:
Stocks involve the greatest amount of risk and volatility, but they also provide the greatest potential for yield.

The average investor needs a mix of stocks and bonds to help balance risk and reward. One way to achieve this balance is through mutual funds.

“Even in a very low interest rate environment, we are able to find companies that can offer significant dividend yields and have some potential for capital appreciation,” says American Funds portfolio manager Joyce Gordon. “Sectors such as utilities, tobacco, telecom and consumer staples have provided above-average and — in many cases — growing dividends. There are many companies in other industries that should do well in a rising rate environment. A diversified portfolio of these investments can help produce income without taking too much risk.”


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.